Conseco Files in 3rd-Largest Bankruptcy

MARK JEWELL

Published
8:00 pm EST, Tuesday, December 17, 2002

AP Business Writer

Insurance and finance company Conseco Inc., deep in debt and facing a federal investigation of its accounting practices, filed for Chapter 11 protection in the third-largest bankruptcy in U.S. history.

The company filed late Tuesday after reaching tentative agreements with two of the three groups of investors owed a total of $6.5 billion from 1990s acquisitions that soured, including a $6 billion purchase that left Conseco with the nation's largest portfolio of mobile-home loans.

St. Paul, Minn.-based Conseco Finance Corp., which oversees that portfolio and other consumer finance products, would be sold under the agreement.

The filing does not include Conseco's insurance operations, which the company and insurance regulators say remain financially sound.

Conseco reached agreements in principal with bondholders owed $2.5 billion in public debt and banks that are due $1.5 billion. Holders of preferred securities, who maintain privileges over holders of common stock in recovering their investments, did not reach a deal and talks will continue, Conseco spokesman Mark Lubbers said.

Conseco is the third-largest company to file for bankruptcy protection in the United States. The company and its subsidiaries had $61.4 billion in assets at the end of 2001. In its filing Wednesday, which excluded its profitable insurance subsidiaries, the company listed $52.3 billion in assets and $51.1 billion in debts.

WorldCom's assets at its July filing totaled $104 billion. Enron had $64 billion when it filed last December.

Before Tuesday, the third-largest bankruptcy was the 1987 filing by Texaco, which had nearly $36 billion in assets at the time. With last week's filing by United Airlines' parent company and now Conseco's, seven of the 12 largest bankruptcies since 1980 have been filed this year.

Conseco maintains the use of assets to measure bankruptcies is inappropriate in its case because its insurance operations are not included in the bankruptcy filing. Also, Conseco says its debt entering bankruptcy is much smaller than several other companies' debts at the time they filed.

Although the bankruptcy filing was unsurprising given Conseco's recent woes, it marked a dramatic downfall for a company whose stock was once a Wall Street darling.

From 1988 to 1998, the company's stock averaged a total return of 47 percent per year and Conseco shares traded as high as $58. Today, the stock trades at less than a nickel per share.

The nation's seventh-largest insurance provider, based in the Indianapolis suburb of Carmel, abandoned a gradual debt-reduction plan Aug. 9 in favor of a negotiated restructuring.

The parties initially hoped to reach a quick deal to avoid further erosion of Conseco's businesses, but the talks dragged on.

Preferred investors were not included in the talks initially, but were later granted a seat after they protested. Bondholders, meanwhile, submitted a proposal in the talks to take full equity ownership of Conseco. Common investors are expected to recoup little, if any, of their losses.

Details of the agreement must still be resolved and approved by investor group members before a reorganization plan can be submitted for the court's approval, Lubbers said. A filing outlining specifics of the plan could be submitted within four to six weeks.

Under terms of Conseco's tentative bankruptcy agreement, Conseco Finance Corp. will be sold to CFN Investment Holdings, LLC, a joint venture of Fortress Investment Group and J.C. Flowers & Co.

The proposed purchase price would be equal to the outstanding amount of CFC's secured debt as of the sale's closing date. Conseco Finance has tentatively secured $125 million in debtor-in-possession financing so it can operate during bankruptcy.

Conseco Finance is insolvent after failing to make a $4.7 million payment due Dec. 4. The unit grew out of the parent company's costliest acquisition, the $6 billion purchase of Green Tree Financial Corp in 1998. That unit, specializing in high-risk mobile home loans, became a burden as loan default rates rose.

In 2000, Conseco's board ousted Chairman and Chief Executive Stephen C. Hilbert _ a one-time encyclopedia salesman who co-founded the company and parlayed his wealth into horse racing and philanthropy, including securing naming rights to the Indiana Pacers' Conseco Fieldhouse _ after he piled up $8.2 billion in debt.

His successor was Gary Wendt, who earned a reputation as a savvy cost-cutter in the 1990s as head of GE Capital Services.

Wendt unloaded about $2 billion in debt, but gave up on his turnaround plan in August in favor of the restructuring talks, and resigned as chief executive Oct. 3 while staying on as board chairman. He was replaced by William Shea, who joined Conseco as chief operating officer in Sept. 2001.

Wendt said as recently as May 1 that Conseco's short-term debt problems were behind it, and that he was confident about next year's prospects. Those statements and other reassurances from Conseco executives led to the filing of a string of shareholder lawsuits.

Shea said the bankruptcy agreement will help Conseco's insurance operations recover from inferior credit ratings that grew out of the parent's debt.

"We believe we have achieved a major step toward what we set out to do in August," Shea said.